A Primer on Portfolio Choice with Small Transaction Costs

Posted: 3 Jan 2018

See all articles by Johannes Muhle-Karbe

Johannes Muhle-Karbe

Imperial College London - Department of Mathematics

Max Reppen

ETH Zürich

H. Mete Soner

ETH Zürich - Department of Mathematics

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

This review is an introduction to asymptotic methods for portfolio choice problems with small transaction costs. We outline how to derive the corresponding dynamic programming equations and how to simplify them in the small-cost limit. This allows one to obtain explicit solutions in a wide range of settings, which we illustrate for a model with mean-reverting expected returns and proportional transaction costs. For more complex models, we present a policy iteration scheme that allows one to numerically compute the solution.

Suggested Citation

Muhle-Karbe, Johannes and Reppen, Max and Soner, H. Mete, A Primer on Portfolio Choice with Small Transaction Costs (November 2017). Annual Review of Financial Economics, Vol. 9, pp. 301-331, 2017, Available at SSRN: https://ssrn.com/abstract=3095982 or http://dx.doi.org/10.1146/annurev-financial-110716-032445

Johannes Muhle-Karbe (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Max Reppen

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

H. Mete Soner

ETH Zürich - Department of Mathematics ( email )

R¨amistrasse 101
Raemistr. 101
Z¨urich, 8092
Switzerland

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